If you want to buy a first home, there are some important steps to take to secure the best mortgage possible, as Ross Hunter from Post Office Mortgages explains...
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You may have your heart set on a flat or house, but feel strict affordability criteria is making it hard to secure the mortgage you need to buy the home of your dreams.
Lenders will ask detailed questions, based on both your income and your outgoings, because they want to be sure you can afford repayments before offering to lend you money.
The key is to demonstrate you have a regular income, a solid employment history, a clean credit record, low levels of existing debt and manageable outgoings. There are also some products which enable you to buy a home with a small deposit.
Here, Ross Hunter from Post Office Mortgages looks at what you can do to boost your borrowing power and the mortgage products that may help you secure your dream home.
1. Demonstrate regular income
As a buyer – and particularly as a first-time buyer – you need to be able to show that you earn a regular income.
Most of us can demonstrate this with our payslips, and lenders will usually need your last three months’ payslips - so dig these out before applying for a mortgage.
You may be able to borrow between three and four-and-a-half times your salary, which means that if, for example, you earn £30,000 a year, you can borrow between £90,000 and £135,000.
However, basing what you can borrow on a simple income multiple is not the whole story. Lenders will also decide how much they are willing to lend based on your outgoings.
If there’s a gap between your current earnings, and the mortgage you need to borrow for the property you want to buy, consider how you could increase your income.
It might be through taking on more responsibility, applying for more senior roles or even asking for a pay rise.
Few of us enjoy having chats with our employers about finances, but a good manager will be open to discussions as to how they can support you progressing your career.
2. Gather more proof of income if you’re self-employed
If you are self-employed, the key is being able to prove your income by showing the lender your business accounts, signed off by a chartered accountant, as well as your tax returns.
Although two may suffice, ideally you need to show three years of accounts. The same applies to your tax returns. You will also need to provide bank statements to support the information in your tax return.
The more you can demonstrate that you earn, the more money a lender may be willing to lend to you.
3. Improve your credit score
Your credit report is a kind of ‘financial CV’ which shows your outstanding credit, and how well you’ve managed credit in the past. Lenders review this to decide whether to offer you a mortgage and at what rate.
Banks and building societies are more likely to offer a home loan to someone with a good credit score and will be willing to lend the most to those with a near-perfect credit score.
To see where you stand, it’s worth getting an idea of your credit rating before applying for a mortgage. You can do this with a credit reference agency, the three big ones being Experian, Equifax and TransUnion (formerly CallCredit).
Once you’ve a copy of your credit report, check if it’s accurate and up-to-date. Contact the credit reference agency right away to correct any errors. You should also get in touch if you see anything unusual or suspicious, as this could be an indication of fraud.
There are then some simple steps you can take to boost your credit score. These include:
- Registering on the electoral roll.
- Paying your bills on time, including all utility and credit card bills, as late payments will show up on your credit file.
- Not breaching borrowing limits.
- Closing any credit cards you are no longer using.
- Not making lots of applications for credit in a short period, as this can lower your score. Only apply for new products when you really need them.
4. Reduce debts
If you have high levels of existing debt, you should try and reduce – or eliminate – these before applying for a mortgage. Begin by reducing balances on credit cards or your overdraft – or closing these altogether.
You should also go through your bank statements and spending to see where you can reduce your outgoings.
This might include, for example, cutting out shop-bought coffees and checking to see if you have any direct debits going out for things you no longer need or use, such as magazine subscriptions or gym memberships.
You can also make some simple savings on energy bills and other utility bills by comparing prices using comparison websites.
If statements show you are conducting your finances well and staying out of your overdraft, it will give a lender confidence that you can cope with a mortgage.
5. Save for a deposit
When looking to purchase a property, you need to have funds saved amounting to a deposit of at least 5% of the price of the flat or house you want to buy.
Generally speaking, the bigger the deposit you can amass, the better your chance of getting a mortgage – and the lower the interest rate will be. But there are schemes and products aimed at helping those who only have a small deposit.
With the Government Help to Buy equity loan, for example, if you can save a 5% deposit, the Government will lend you up to 20% of the value of a new-build property you want outside London (40% London, 15% in Scotland).
There is no interest to pay on the 20% loan for the first five years, and you then take out a mortgage on the remaining 75% of the property’s value. The new-build property must be worth less than £600,000 in England, £300,000 in Wales and £200,000 in Scotland.
6. Tailored first-time buyer mortgages
Post Office has tailored mortgage products available for first-time buyers struggling to save a large deposit.
With Post Office Family Link™ mortgage, provided by Bank of Ireland UK, you can get a mortgage at 90% loan-to-value (LTV) with the remaining 10% raised as a mortgage secured against the home of your assistor (usually a parent – or another close family member) – as long as it’s mortgage-free.
For the first five years, you make two separate payments. The first goes towards the assistor’s mortgage – the 10%, which is interest-free. The second goes towards your own mortgage – the 90%, where interest rates will apply.
After five years of payments, you will have paid off the 10% assistor’s mortgage and reduced the balance on your own 90% mortgage.
In addition, provided house prices don’t go down, you will have reduced the size of your mortgage compared to the value of your home. It's worth noting that the assistor is required to take legal advice before you take out a Family Link mortgage.
With Post Office First Start mortgage, also provided by Bank of Ireland UK,there are product options ranging from 95% LTV to 75% LTV, meaning you can buy a home with a deposit of as little as 5%.
With First Start, your parents can help boost your borrowing power. You apply for a mortgage with a close relative, and the sponsor will act as a co-borrower and have the option to be on the title of the property.
When assessing the level of borrowing, the two highest incomes, from applicants and / or sponsor will be taken into account – potentially increasing the amount you can borrow.
The maximum loan is £500,000 and you and the sponsor are both liable for the total loan and monthly repayments.
6. Look into extending the term of the mortgage
One final way to boost your borrowing power is by opting for a longer term on your mortgage.
While mortgages typically last for 25 years, you could think about extending the term to 35 years, for example. This will help you cut your monthly outgoings, as your monthly repayments will be lower.
But be aware that even though a longer term will give you greater borrowing power by making payments more affordable, you will end up with a bigger interest bill overall, as you will be paying interest on the capital borrowed for a longer period.
With Post Office, you have the flexibility of being able to choose to borrow over a term of up to 35 years, but before making any decision, you should weigh up the pros and cons and also understand that you can change your mortgage duration when your current deal comes to an end.
Your home may be repossessed if you do not keep up with repayments on your mortgage.